Pension decision period extended so savers can take advantage of new flexibility

Out-Law News | 10 Apr 2014 | 5:01 pm | 2 min. read

People who have recently withdrawn a tax-free lump sum from their defined contribution (DC) pension savings will be given longer to decide what to do with the balance, allowing them to take advantage of next year's reforms, the government has announced.

Under current tax rules, pension savers must choose to purchase an annuity or enter into a capped drawdown arrangement within six months of withdrawing a tax-free lump sum. If they do not, the lump sum will be taxed at 55%. The extension will give savers 18 months to decide what to do with the rest of their pension savings, allowing them to access the money more flexibly when changes announced at the Budget come into force next year.

"This is welcome news for members of DC schemes who have chosen to reverse recent retirement decisions in order to benefit from the new flexibility that comes in next year," said pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com.

"Members who had taken a tax-free lump sum and bought an annuity were faced with penal tax charges if they decided to cancel the annuity during the cooling-off period. HMRC are to be commended for having sorted this out once the pensions industry had highlighted the problem," he said.

The extended decision period will apply to those who received a tax-free lump sum on or before 27 March 2014, including those who cancelled an annuity contract within the cooling-off period following the Budget announcement, according to new guidance from HMRC. However, those who have already started to receive an income under an annuity for which the cooling-off period has ended will remain bound by the contract they made with their provider.

From April 2015, the government intends to give savers the ability to access their DC pension savings any way that they wish from the age of 55. All savers would also be offered free and impartial face to face financial guidance at the point of retirement, backed by a new legal duty on pension providers and trust-based pension schemes to offer this guidance.

Under the proposed new regime, savers would still be able to take up to a quarter of the value of their pension pot tax-free on retirement. Any additional lump sum would then be taxed at their normal marginal tax rate rather than the existing 55% tax rate. Savers would still be able to purchase an annuity or drawdown product if they chose to do so, or alternatively would be able to keep their pension invested and access the balance over time.

Additional flexibilities for those looking to purchase annuity or drawdown products under the existing regime came into force on 27 March. The minimum income requirement for accessing flexible drawdown has been cut from £20,000 to £12,000 where scheme rules permit; the capped drawdown limit has increased from 120% to 150%; the lump sum that can be taken from small individual pots regardless of total pension savings has increased to £10,000; and the maximum that can be taken as a trivial commutation lump sum has almost doubled, to £30,000.

The Financial Conduct Authority (FCA), which regulates product providers and financial advisers, has also published guidance setting out what firms need to do during the interim period before the more fundamental changes come into force to ensure that customers are treated fairly. In particular, both advisers and providers will be expected to ensure that customers are aware that offered rates could fall or of the dangers of ignoring guaranteed rates if they decide not to purchase an annuity before April 2015, according to the document.